How to Trade Options

How to trade options. Optimal options investment strategy that focuses on risk management, minimizes your downside and maximizes your returns.

Options Investment Strategy

What is the optimal options investment strategy? One that focuses on risk management. That is the only way to manage your downside and to lower your volatility of returns.

As George Fontainills notes, the main difference between a winning investor and a losing investor is the vision to systematically spot good opportunities. Warren Buffett is such an example.

But this vision can be developed. While some of it might be inborn, most of it can be systematically developed, just like how you learnt to systematically solve a Math problem in school.

Before Entering an Options Trade

He also suggests four powerful questions that you must ask yourself before entering any investment:

  1. How much profit can I make?
  2. What is the maximum loss I can take?
  3. At what point will I get out if I am wrong?
  4. When should I take profits?

Entering an Options position

There are typically three main aspects of an options position that you need to consider:

  • Direction of movement of the underlying security
  • Duration of movement of the underlying security
  • Magnitude of movement of the underlying security

In order to make money with options, you need to be correct on all three variables, and understand how the three variables are interrelated.

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